Headline inflation ticked lower this month to 2.6% while the core continued to press higher to 2.3%.   The devil is in the details though.  The headline is being compressed by very difficult year over year comps with last year’s big energy boom in Q1.  April 2011 was when energy prices peaked last year so we’re likely to see more of the same in the next report.  The headline will appear depressed, but the ex-energy component will likely tell the true story.  It’s an interesting dynamic because many of those who continually cry about the headline rate will now point to the core’s rise as a sign of inflation fears.   But while inflation is on the rise it’s hardly becoming a major concern.

Perhaps more importantly, the 2.3% core rate is likely to keep the Fed at bay with regards to future stimulus.  They’ve been very clear about their position on this – with the rate over 2% they’re hesitant about further stimulus.  With signs of recovery and higher inflation the Fed is growing increasingly wary about exacerbating any upside in inflation.

I think inflation is likely to tick higher in the coming quarters particularly at the headline rate (with the exception of next month) because the comps with energy will become very low.   I would not be surprised to see a headline rate over 3% and approaching 3.5% by the end of this summer.

My housing adjusted CPI is even lower than the BLS report.  At 1.3% it has been consistently depressed and shows no signs of inflation worries.  This is not surprising given the continued sluggish economy.




Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:

  • Conscience of a Conservative

    I can’t see how the CPI can be something we should pay attention to.
    To start with a large component is in the form of owner equivalent rent which is done via survey, asking “how much do you think you’re home would go for”, second price increase are always factored out due owing to hedonism(e.g. your car has costs more but it pollutes less, so that’s not a price increase), while when appliances or cars are decontented to hold price down, even if that means the dishwasher breaks after 7 years instead of 15, they don’t apply a reverse hedonism multiplier. The list goes on with geometric averages to not factor in iceberg lettuce price spikes, substitution effects to tell us say meat didn’t go up because we can switch to chicken, and lastly the Fed claims food and energy don’t count either because they aren’t “core”.

    The irony in all this is that the Fed claims they have an inflation target, even though what they are really targeting is asset prices(e.g. quantitative easing drives up risk assets)

  • zebra

    how about house rent? this is the biggest part of one’s monthly expense. the rent has steadily increased over the past few years since the housing bubble bust, my landlord just raised my rent for 10%. the true inflation is much more than what the news paper title told u.

  • Social Lawyer

    I agree with Conscience that the CPI is not a precise metric due to the substitutions, but had assumed it might be in the ballpark. Now, I am not sure it has any credibility.